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3 Things to Watch With Krispy Kreme Doughnuts

These three factors could hold the key to big gains for Krispy Kreme.

Krispy Kreme Doughnuts(NYSE: KKD) operates as a provider and wholesaler of (yummy!) doughnuts and beverages worldwide. As of its most recent quarter, it operated 93 stores and had an additional 618 franchised out.

Today, let's look at three things investors should be watching regarding Krispy Kreme Doughnuts, as they will provide us better insight into the company.

1. Cost controlsAsk any Krispy Kreme shareholder and they'll tell you that next to a delicious Kreme-filled, mouth-watering doughnut... what was I talking about? Oh yeah, next to the deliciousness of its doughnuts, Krispy Kreme's cost controls are the most important factor to watch.

In the early 2000's Krispy Kreme was expanding at breakneck speed and nearly went belly-up after it spread itself too thin and was walloped by a move toward healthier eating patterns that often reduced carbohydrate intake in consumers' diets. Between 2004 and 2009, according to Krispy Kreme, the company closed 240 domestic locations -- a total about equal to as many stores as it had open in the U.S. when the year began. This signifies the seriousness of the dilemma Krispy Kreme faced.

Now that it's moved beyond those issues, it can focus on keeping costs low and making its stores more efficient. Krispy Kreme has been utilizing cloud-based service-oriented architecture in some of its Texas stores that allows company officials to access everything from payroll to gift cards from any Web browser, saving time and money. Also, Krispy Kreme is looking to go smaller. Having learned its lesson about expanding beyond its means, it's focusing on smaller factory stores to keep costs low and maximize its potential in smaller population areas.

2. Menu and beverage innovationControlling its costs and exhibiting prudent fiscal management is one part of the puzzle for Krispy Kreme, but menu and beverage innovation can't be discounted either. In addition to driving die-hard customers back into its stores it needs to be able to attract new and previously unreached consumers -- and that means innovating on all fronts.

One key growth driver that could put some pep in Krispy Kreme's step is coffee sales. In 2011, the company introduced three signature blends to be sold in its shops and for home-brewing purposes. The move is bold (pun intended) because, while the coffee market has been lucrative, it's brutally overcrowded with competition and partnerships. Starbucks(Nasdaq: SBUX) sits at the top of the heap when it comes to coffee sales, followed closely by Dunkin' Brands(Nasdaq: DNKN), a direct doughnut and coffee competitor to Krispy Kreme. Both Starbucks and Dunkin' have partnerships with Green Mountain Coffee Roasters(Nasdaq: GMCR) to carry their single-serve K-Cup offerings in their restaurants. Even fast-food chain McDonald's(NYSE: MCD), which has its own coffee supplier in Gavina, stands as a threat to Krispy Kreme increasing coffee sales. In short, between partnerships and deep pockets, Krispy Kreme has a challenge on its hands.

Another way Krispy Kreme is answering the demands of its customers is by introducing healthier food options, including yogurt, oatmeal, and fruit juice. That doesn't mean these will necessarily succeed, but they worked so well for McDonald's and Starbucks that it's worth a try.

3. International expansionAlthough the company needs to be smart with its money, it'd be wise to continue to look abroad for further growth prospects with much of the U.S. market flooded with those aforementioned competitors.

Krispy Kreme is getting closer to having 500 international stores and, last year, laid the groundwork to target 900 international locations by the year 2017. It has signed agreements to open 35 additional stores in the United Kingdom over the next five years, outlined plans to build in excess of 90 stores in Japan, and has decided to take on Dunkin' Brands by opening up its first store in India. Foreign markets like India have a growing middle-class of young workers that would be a perfect target audience for Krispy Kreme. Again, keep your eyes peeled for excessive spending, but international markets look like a genuine area of consistent growth for Krispy Kreme.

Foolish roundupNow that you know what to watch for, it should be easier to analyze Krispy Kreme Doughnuts' successes and pitfalls in the future, and hopefully you'll gain a competitive investing edge.

If you're still craving even more info on Krispy Kreme Doughnuts, I would recommend adding the stock to your free and personalized Watchlist so you can keep up on all of the latest news with the company.

With competition in the coffee sector so fierce, it pays to understand the ins-and-outs of how input prices and competitors can affect a stock. That's why our analysts combed through Green Mountain Coffee Roasters in our latest premium research report to bring you the opportunities and pitfalls that could move the stock. Also included with this report is one full-year of updates. Click here to get your copy and claim your investing edge.

Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. Kreme-filled chocolate glazed are his favorite doughnuts. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Starbucks, Green Mountain Coffee Roasters, and McDonald's. Motley Fool newsletter services have recommended buying shares of Starbucks, Green Mountain Coffee Roasters, and McDonald's, as well as writing covered calls on Starbucks, writing naked calls on Dunkin' Brands, and creating a lurking gator position on Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's too busy being delicious.

Author

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong